GLOBAL GREEN GROWTH INSTITUTE GREEN INDUSTRY MAPPING STRATEGY BUSINESS CASE – SLAG CEMENT IN JAVA JUNE 2014
GGGI – Green Industry Mapping Strategy
TABLE OF CONTENTS Executive Summary................................................................................................................................. 3 Setting the scene................................................................................................................................. 3 The Opportunity.................................................................................................................................. 3 The Challenges and way forward ........................................................................................................ 3 The Recommendations ....................................................................................................................... 4 1
Introduction ............................................................................................................................ 5
2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8
Needs analysis ......................................................................................................................... 6 Overview ................................................................................................................................. 6 Opportunity analysis ............................................................................................................... 6 Stakeholder review ................................................................................................................. 8 Situation analysis .................................................................................................................. 10 Policy analysis ....................................................................................................................... 14 Size of the opportunity ......................................................................................................... 14 Current state of the market .................................................................................................. 15 Summary ............................................................................................................................... 15
3.1 3.2 3.3 3.4 3.5 3.6 3.7
Cost benefit ........................................................................................................................... 16 Market Opportunity .............................................................................................................. 16 Business case scenario .......................................................................................................... 17 Cost benefit of slag re-use .................................................................................................... 19 Economic benefit .................................................................................................................. 21 Social impact ......................................................................................................................... 21 Environment impact.............................................................................................................. 22 Summary ............................................................................................................................... 24
4.1 4.2
Key challenges ....................................................................................................................... 25 Regulatory framework .......................................................................................................... 25 Investment environment ...................................................................................................... 25
3
4
5. Recommendations & next steps ....................................................................................................... 27 5.1 Recommendation........................................................................................................................ 27 5.2 Next Steps ................................................................................................................................... 27 References ............................................................................................................................................ 28 Annex 1: Annual cost-benefit and related data .................................................................................... 30
Slag cement in Java
2|Page
GGGI – Green Industry Mapping Strategy
Executive Summary Setting the scene The Java region is the mainstay of the Indonesian economy, with 47% of national GDP and 60% of national employment (BPS, 2012). This is primarily due to concentration of manufacturing industries in Java: 96% of national steel and 68% of national cement production capacity is concentrated in the region (OECD, 2013), together with other industries and commerce. With planned increases in both steel and cement production capacity in Java, there is an opportunity to gain economic and environmental benefits through the re-use of steel slag in the cement sector.
The Opportunity Slag cement is produced from blast furnace slag, which is a by-product of steel and iron smelting. Once suitably treated this by-product can be used as a substitute for clinker in the production of cement, reducing the need for clinker and leading to a reduction in GHG emissions and energy use. This business case assumes that blast furnace slag is purchased by a cement producer who invests in a slag powder processing plant to produce slag cement, with the end product being sold to construction and infrastructure industries. Future cash flow projected for the project period (20152025) is based on the revenue from slag cement sales, initial investment cost of the plant, and an EBITDA ratio of a conventional cement producer in Indonesia. Based on the business case scenario evaluated here, investment in a slag powder processing plant for the utilization of blast furnace slag is capable of delivering an investment IRR of 27% over the project lifecycle, with investment breaking even in five years. Alongside direct investment drivers, it is estimated that cumulative slag cement sales revenue when compared with 2011 GDRP would contribute 1.1% of GDRP in the Java provinces excluding Jakarta, or 3.3% of GDRP generated in West Java. Furthermore, the investment is expected to lead to the generation of around an additional 300 employees in West Java by 2025. The environmental impact of the business case is assessed through a comparative analysis between forecasted GHG emissions from cement production under the baseline scenario (business-as-usual), and project scenario. Use of slag cement is expected to reduce GHG emissions of the West Java cement sector by 5.4% on average over the 10 years to 2025, when compared to baseline scenario.
The Challenges and way forward The major challenge steel and cement industries face is the current regulatory environment for slag re-use. Slag is currently categorized as a hazardous waste, which hinders the potential benefits that slag re-use may offer. The Indonesian government has indicated that it is planning to ease its regulation on industrial waste on hazardous and toxic materials (B3), through re-categorizing slag to ‘special waste’ (Indonesian Mining Association, 2012); however, this has yet to occur. A recent joint venture between Krakatau Steel and PT Semen Indonesia illustrates the private sector movement, where local labour and contractors were hired for construction of a slag powder and slag cement processing plant. This partnership demonstrates the potential economic and social benefits Slag cement in Java
3|Page
GGGI – Green Industry Mapping Strategy
that investment in slag processing may offer, in addition to the proven environmental benefits. Furthermore, compared to many other green growth opportunities, the technology barriers and financial requirement to deliver the opportunity are comparatively low: the re-use of slag can be regarded as ‘low-hanging fruit’ that could be more easily implemented following a change to government regulation regarding the classification of slag.
The Recommendations Re-use of slag represents a unique near-term investment opportunity in Java: it could result in GHG emissions reduction opportunities while contributing to the regional economy. The deployment of this opportunity would be greatly enhanced through re-categorization of slag from hazardous waste to a non-waste by-product. To this end, policymakers could identify alternative waste management policies adopted in other jurisdictions, such as the policies adopted by the European Union. Coordination between the Government of Indonesia and private sector stakeholders should facilitate the re-categorising of slag: this process could draw upon other countries’ experiences, and review against current hazardous waste regulations and slag cement standards..
Slag cement in Java
4|Page
GGGI – Green Industry Mapping Strategy
1 Introduction The Government of Indonesia (GoI) has an ambitious plan to become one of the world’s developed economies by 2025, with a gross domestic product (GDP) of USD $4 - $4.5 trillion (MP3EI, 2011). In the meantime, the government has a domestic target to reduce greenhouse gas (GHG) emissions by 26% below business as usual levels by 2020, and by 41% through international support (GGGI, 2013). The growth pattern of Indonesia is heavily dependent on extractive industries, which poses a significant challenge for the government to simultaneously support strong economic growth whilst also delivering significant emissions reductions. In October 2011, Indonesia launched the National Action Plan for the Reduction of GHG emissions (RAN-GRK) as a work plan in accordance with the national target to reduce emissions by 26% from BAU by 2020. In order to facilitate this effort, the government has assessed and revised industrial abatement policies in renewable energy, waste management, and energy efficiency. As one of the many efforts to combat greenhouse emission in Indonesia, the Green Industry Mapping Strategy (‘GIMS’) was jointly developed between GGGI and the Indonesian government in 2012, to assess the opportunity for accelerated investment in a range of green technologies in Indonesia, including the additional environmental and economic consequences against a business as usual forecast. GIMS forms Component 1C of a broader green growth program between GGGI and the Indonesia Government, the GoI – GGGI Green Growth Program. The Green Growth Program is a comprehensive program to develop a green growth framework and a suite of tools that can be used to help stream green growth into existing planning and investment appraisal processes (GGGI, 2013). By working closely with the central government, the Green Growth Program has helped identify and prioritize green growth opportunities along with a number of criteria related to both sustained economic growth and GHG emission reduction potential (GGGI, 2013). This business case introduces an alternative type of cement ("slag cement") as a green growth opportunity for Indonesia. Slag cement is manufactured using blast-furnace slag, a by-product from blast-furnace-based iron production, as a substitute for clinker in cement production. Portland Blast furnace Slag Cement (ASTM C595) maintains a similar or improved quality profile compared to Ordinary Portland Cement (ASTM C150); however, slag cement reduces significant amount of GHG emissions from the cement making process by reducing the clinker content of the cement. This business case is highly relevant to Indonesia's aspiration to develop its green growth strategy. Considering steel and cement industries as the backbone of infrastructure development which is essential for fast-growing economies like Indonesia, there are considerable environmental opportunities and co-benefits from addressing the activities of these two industries.
Slag cement in Java
5|Page
GGGI – Green Industry Mapping Strategy
2 Needs analysis 2.1 Overview Indonesia is one of the most prominent developing countries in Asia. Along with economic growth, steel and cement consumption has been growing steadily. According to OECD (OECD, 2013), demand for steel and cement is highly correlated to economic growth as steel and cement are basic elements for infrastructure and construction. With forecasted increase in capital investment on infrastructure and construction as depicted in Figure 1, Indonesia may expect further growth in demand for steel and cement.
Figure 1: Total Capital Investment for Construction and Infrastructure (BMI, 2013)
2.2 Opportunity analysis Slag has long been commonly used as a construction material since the Roman Empire and continued to find its uses in road paving, cement, heat and sound isolation, filtration, agriculture, and tile and glass production – across Europe, USA, and Asia. Also, using slag as a raw material for cement is recognized as one of the key GHG emission mitigation actions in global cement manufacture processes. Likewise, slag utilization is becoming more and more important as a lead indicator to demonstrate increased efficiencies in the sustainable production of steel. In 1998 the Steel Slag Coalition ("SSC"), a group of 63 major companies in the steel industry, carried out a comprehensive study on the chemical composition of slag and its potential risk to human Slag cement in Java
6|Page
GGGI – Green Industry Mapping Strategy
health and ecology. This study demonstrated that slag poses neither a meaningful threat to human health nor the environment when used in a variety of residential, agricultural, industrial and construction applications. Globally, slag is widely accepted for various purposes due to its acknowledged benefits and it is strongly aligned with the objectives of the ‘Circular Economy’ which is pursued by a number of developed countries around the globe. Countries pursuing the concept of a circular economy, such as the EU, USA and Japan, promote slag utilization with aims to support industrial symbiosis between steel and cement industries by providing an enabling policy environment. Specific examples for this policy direction are presented in the GGGI International Leading Practice report published as part of this project. In Japan, about 40 million tonnes of steel slag is produced annually as a by-product of iron and steel production and 95% of the slag produced in Japan is reused as raw material for cement, road base or civil engineering based on the chemical and mechanical properties. The Japanese Government is also supporting the private sector's slag utilization by policy design, for instance, by including slag-containing construction material under Green Purchasing Laws. Production Value Chain of Slag Where steel furnace and electronic arc furnace slag are used primarily for road construction, the main usage of blast furnace slag is in cement production (Figure 2).
Figure 2: Production Value Chain (Euroslag, 2012)
Slag cement in Java
7|Page
GGGI – Green Industry Mapping Strategy
The American Society for Testing and Materials (ASTM), an international standards organization that develops voluntary technical standards for a wide range of materials, products, systems, and services defines, Ordinary Portland Cement (ASTM C150) as “hydraulic cement produced by pulverizing clinkers consisting essentially of hydraulic calcium silicates, usually containing one or more of the forms of calcium sulphate as an inter-ground addition�. Portland cement is the most common type of cement in general use around the globe and therefore, this business case uses this cement type as the baseline to be compared to the green growth opportunity. Blast furnace slag is a valuable raw material for a cement manufacturer because it can be blended with Portland cement to dematerialize kiln and clinker processing which involves GHG-intensive fossil fuel burning and chemical processes. This positive environmental impact of slag cement production from reutilizing blast furnace slag compared to manufacturing Ordinary Portland cement are recognized by UNFCCC as the key mitigation options in the cement sector and many Clean Development Mechanism (CDM) projects (for the generation of tradable Kyoto-recognized certificates created from greenhouse gas abatement actions) are already registered globally. Also, global cement manufacturers advocate that blast furnace slag cement may have many advantages over ordinary Portland cement. Typical advantages for blast furnace slag cement advocated by cement manufacturers are listed below (Lafarge, 2014). 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Higher ultimate strength Lower heat of hydration Better sulphate / Chloride resistance Better workability Less bleeding Long Slump Retention due to the slower hydration process Greater Pore Filling Capacity Reduced Permeability Greater durability Reduced Risk of Alkali-Silica Reaction With Aggregates Lighter colour and better lighting
2.3 Stakeholder review A successful re-categorization of slag would involve a wide range of stakeholders, including government, industry associations and private companies. Identifying the role of key stakeholders will facilitate change in regulation. Government landscape The Ministry of Environment (KLH) is responsible for formulating environmental policies and control for environmental impacts. Most importantly, the Ministry regulates hazardous waste and substance. As substituting clinker by blast furnace slag requires re-categorizing slag from hazardous waste to non-hazardous by-product, role of KLH is crucial. KLH is proactive towards the industrial Slag cement in Java
8|Page
GGGI – Green Industry Mapping Strategy
waste management issue, promoting programs such as ‘Promote and Implement 3Rs’, ‘Proper Program’ (a Program of assessment and performance rating of industry in environmental management) and ‘Green Industry Award’ (UNCRD, 2013). Ministry of National Development Planning (BAPPENAS) is the Ministry in charge of the Government of Indonesia and national development planning matters. The main task for BAPPENAS is to promote economic development, regional development and preservation of natural resources, human resources and foreign cooperation. The Ministry of Industry (KP) administers industry and trade activities such as the registration of companies, metrology, business and market development domestically and conducts research and development of industry and trade. Communication between the iron, steel industry and cement sectors can be enabled through KP, and the Ministry plays a key role in structuring partnerships. Private Sector landscape The role of the private sector is crucial, as the private sector is a major investor in the steel and cement industries. Currently, both the steel and cement industries in Indonesia are keen on cooperating to establish slag powder processing plant to benefit from industrial symbiosis. The case study (below) illustrates this relationship, with the two industries have agreed to co-invest in slag powder processing plant for the production of slag cement. Respective industries and industry associations are the main private stakeholders. As cement industries can utilise slag as an input to their production process, Indonesia Cement Association (ASI) and cement industries are one of the most vital stakeholders. Indonesian Iron and Steel Industry Association (IISIA) is also a crucial stakeholder as cost of processing slag beared by iron and steel industries.
Case Study: Steel & Cement Industry Joint Venture On 10 January 2014, Krakatau Steel and PT Semen Indonesia (SMI) signed a joint venture, which is engaged in the production of Slag Powder (Ground Granulated Blast Furnace Slag, GGBFS) under the name of PT Krakatau Semen Indonesia (KSI). Given that Granulated Blast Furnace Slag (GBFS) from steel manufacturing can be used as raw material for the cement production, the venture has co-operated in the construction of slag powder plant with SMI. The facility will be built on seven hectares of land in Ciwandan, West Java and construction is expected to be completed in the 4th quarter of 2015, with estimated investment cost of USD37m (Rp450bn) (Deutschebank, 2013). Slag produced from Krakatau Steel will be used to lower the clinker content in SMI’s cement production. SMI has plans to expand its cement production capacity and to locate its plant adjacent to the slag powder plant. This will not only enable direct purchase of slag produced by the slag powder plant from the joint venture but also ensure efficiency and certainty of sale of slag powder. Furthermore, the establishment of slag powder plant will directly solve problems of B3 waste treatment from the blast furnace plant. These conditions cannot be compared when done by parties who are unaffiliated with the Company (IDX, 2013). Slag cement in Java
9|Page
GGGI – Green Industry Mapping Strategy
2.4 Situation analysis Iron and Steel Industry In Indonesia, 96% percent of the steel production capacity is concentrated in Java, especially in West Java, with 63% of the capacity (Table 1). Throughout Indonesia, there are 11 major steel producers and more than 80% of the manufacturers are located in West Java (Figure 3).
Table 1: List of Steel Companies Operating in Indonesia (OECD, 2013)
Company
Location
1
Krakatau Steel
Cilegon
W. Java
2
Krakatau POSCO (35%)
Cilegon
W. Java
3
Krakatau Osaka
Cilegon
W. Java
4 5 6 7
Cilegon Bekasi Bekasi Bekasi
W. Java W. Java W. Java W. Java
Bekasi Surabaya
W. Java E. Java
10
Indoferro JIFE Gunung Gunung Raja Paksi Essar Indonesia Gunawan Dianjaya Meratus Jaya
11
Semani
Tanah Bumbu Makassar
South Kalimantan South Sulawesi
8 9
Facility Type
Capacity
Operation
BFS Hot Strip Mill BFS, BOF
1.2 mmt 3.5 mmt 6.0 mmt
2015 2014 2013
Plate Mill Rebar/Small Sections Mill BFS phase 2 CGL EAF BFS BOF Cold Strip Mill Plate Mill
1.5 mmt 0.5 mmt
2013 2015
0.5 mmt 0.4, 1.2 mmt 1.2 mmt 2.0 mmt 1.4 mmt 0.7 mmt 1.0 mmt
2012, 2014 2016 2013 2014 2015 2014 2015
DRI
0.3 mmt
2012
CGL
0.5 mmt
2012
Figure 3: Distribution of Steel Manufacturer (OECD, 2013)
Slag cement in Java
10 | P a g e
GGGI – Green Industry Mapping Strategy
Whilee steel consumption in 2015 is forecasted to reach 14.9 million tonnes per year (Figure 4), domestic capacity forecast is expected to increase only up to 10 million tonnes per year by 2015 (Figure 5), meeting only two-thirds of the demand.
Figure 4: Steel Consumption (BMI, 2013)
CAGR 33%
10% 33% 2%
1%
5% -
Figure 5 : Change in steel production capacity by country (OECD, 2013)
Slag cement in Java
11 | P a g e
GGGI – Green Industry Mapping Strategy
The Ministry of Industry (KP) has targeted the steel industry as one of the industrial priorities across Indonesia’s Economic Development Corridors (IEDCs). According to KP (Ministry of Industry of Indonesia, 2011), mid-term (2010-2014) and long-term (2015-2025) expansion targets are set in order to boost the steel industry which includes specific targets for increasing installed capacity of crude steel, steel consumption per capita, as well as iron making industry and iron ore capacity. Furthermore, Indonesia will soon have ASEAN’s first large-scale blast furnace which will have a significant impact on the structure of steel supply and demand (OECD, 2013). Cement Industry Cement production capacity in Indonesia is around 56.8 million tonnes per year, with production being heavily concentrated amongst a small number of producers (Table 2). Three major companies (PT Indocement Tunggal Prakarsa, PT Semen Gresik and PT Holcim) account for two-thirds of total production, with further six companies accounting for the remaining 33% of production capacity. Similar to the steel industry, approximately 68% of cement production capacity is concentrated in Java, especially in Sulawesi and Kalimantan region (Figure 6).
Table 2: List of cement manufacturers and production capacity (Semen Gresik, 2012)
Company PT Semen Padang PT Semen Gresik PT Semen Tonasa PT Holcim PT Indocement Tunggal Prakarsa PT Semen Baturaja PT Semen Andalas Indonesia PT Semen Kupang PT Semen Bosowa Maros
Production Capacity(mt) 6.4 11.4 4.7 8.5 18.6 1.3 1.6 1.5 3.8
Figure 6: Distribution of Cement Industry in Indonesia (Semen Gresik, 2012)
Slag cement in Java
12 | P a g e
GGGI – Green Industry Mapping Strategy
Figure 7: Cement Consumption (Semen Gresik, 2012) / Production (BMI, 2013)
Cement consumption and production forecast from 2015 to 2025 is shown in Figure 7, and illustrates a growth rate of 6.1% for consumption and 5.8% CAGR for production, over the course of 10 years. These two rapidly growing steel and cement sectors in Indonesia will provide a solid opportunity for Java to reduce its overall GHG emissions from slag cement. Java Industry analysis identified that steel and cement industries are heavily concentrated in Java. Java is the smallest of the five major islands in Indonesia, with an area of 132,107km2 (Ministry of Industry of Indonesia, 2012). However, the region is one of the most economically developed regions in Indonesia with 47% of the national GDP (BPS, 2012) . Within Java, West and East Java (where most of the cement industries are located) account for more than 50% of the regional GDP. Other than steel and cement industry, petrochemical, textile, automotive and industrial electronics industries are currently operating in Java. With these various industries being located in the region, Java region employs 60% of the national population (BPS, 2012). Furthermore, during 2011, foreign direct investment in Java was the highest amongst the islands, with approximately USD7.3b (Ministry of Industry of Indonesia, 2012).
Slag cement in Java
13 | P a g e
GGGI – Green Industry Mapping Strategy
Java is also the major source of GHG emissions arising from industrial activity in Indonesia, with around 57MTCO2 released in 2008. Around 90% of cement production occurs in Java, and is a contributor to these GHG emissions (BMZ, 2009).
2.5 Policy analysis National strategies/policies on hazardous waste include:
Encouraging generators to implement hazardous waste minimization and avoidance strategies in their activities; Promoting waste exchanges; Encouraging establishment recycling facilities for hazardous wastes; and Implementing environmental compliance program for industries
Hazardous waste can only be treated in designated commercial facilities. As treating hazardous waste incurs additional costs to industries, it provides an opportunity for generators to calculate the costs and to effectively manage hazardous waste. To discourage any improper management of waste, Chapter IX of the Law of Republic of Indonesia No 23/1997 states that any recklessness and or intentional mismanagement of (hazardous) wastes that violate applicable environmental and other rules might be liable for imprisonment and fine. The “PROPER” compliance program as mentioned in the stakeholder analysis section is launched by KLH to assess industries’ management of hazardous waste. Inspectors conduct compliance audits to industries, rank them into five categories (black, red, blue, green, and gold) and the results are then announced publicly every year. Industries are penalized in terms of access to financial resources for instance, if ranked black or red. However, Indonesia has proposed reclassifying 14 materials under B3 waste, which are currently considered as hazardous waste, to be “special waste”. This amendment is stated in the Draft Government Regulation (RPP) on B3 Waste Management (Indonesian Mining Association, 2012) which will allow usage of the 14 materials under B3, if processed under certain procedures.
2.6 Size of the opportunity The size of the opportunity has been estimated based on forecasted steel production capacity. Referring back to Figure 5, steel production capacity is planned to increase by 66% to 10 million tons from 2013 to 2015. Theoretically, assuming 33% slag production rate (as estimated by POSRI Research Institute), 3.3 million tons of slag is expected to be produced in 2015 based on current steel capacity expansion plans. If this is fully taken up by the cement producer to produce slag cement, at slag cement price (HS Code 2523) of $68 USD per ton, the market for slag cement is estimated to be approximately 224.4 million USD. Furthermore, as GHG emissions can be avoided through production of slag cement, under the assumption that this project is registered as a CDM project, CER revenue can also be additional source of revenue. Slag cement in Java
14 | P a g e
GGGI – Green Industry Mapping Strategy
2.7 Current state of the market The level of technology required for slag-powder processing is market-available, mature and is known to be very similar to blend cement processing. Furthermore, as seen in the case study, despite significant initial investment cost of slag powder processing plants (180 million USD for 3.5 million tonnes annual capacity (Jakarta Post, 2014)), the private sector is willing to invest. However, as slag is categorized as hazardous waste, slag cement production has been limited. The recent joint venture (outlined in the Private Sector Analysis section), has been one of the first steps taken to slag cement production.
2.8 Summary This section has provided an overview of the industries’ prospects, distribution, relevant stakeholders and regulation regarding slag reutilization. The following section considers the business case and for pursuing this opportunity.
Slag cement in Java
15 | P a g e
GGGI – Green Industry Mapping Strategy
3 Cost benefit The cost benefit of developing slag cement in Indonesia is dependent on a range of factors, including the physical and policy setting for the investment (Section 2), and the financial viability of the project (this Section). This cost benefit analysis focuses on the investment rationale between the cost to construct slag-powder processing plant and net cash flow generated from future revenue stream of slag cement sales. The business case assumes that all the available slag in the market are fully utilized and purchased at the current slag cement price, adjusted for inflation. In this section the cost benefit of slag re-use is set out: Section 3.1 identifies the market opportunity, with subsequent following sections setting out the cost benefit for the technology. The investment required to deliver this change, and the financial viability of this change, are considered in Section 3.3: the economic, social and environmental impacts stemming from this investment are assessed in Section 3.4 to 3.6.
3.1 Market Opportunity Along with forecasted growth in both steel and cement production, the highly GHG intensive nature of the cement industry provides a strong case for pursuing this opportunity in Indonesia. The nearterm opportunity lies in slag cement production in Java, and the location is selected based on: ď‚&#x; ď‚&#x;
The location of major blast furnace manufacturing facility as slag supplier, and The location of cement manufacturing as slag user
The proximity between supplier and the user is crucial: slag is a high volume, low value bulk product, and a need to transport it long distances would drive higher transportation costs and lower the commercial value of the slag.
Figure 8: Distribution of both Cement and Steel Industry in Indonesia (Semen Gresik, 2012) (OECD, 2013)
In this sense, Java provides the best near-term opportunities for the re-use of slag from steel smelting in the production of cement. The cement and steel industry distribution map (Figure 8) Slag cement in Java
16 | P a g e
GGGI – Green Industry Mapping Strategy
illustrates that major steel manufacturers such as Krakatau, JFE, Indoferro, Gunung, and Essar Indonesia are operating in Java along with six other cement manufacturers.
3.2 Business case scenario Business as usual The production of steel and cement under the Business as Usual (BAU) scenario is based on published forecasts for Java’s future steel and cement production (Figure 9). Steel production capacity is based on Java’s iron and steel forecast (OECD, 2013), while cement production is estimated based on Java’s share of cement production capacity (Table 10) and national cement production forecast (Figure 7).
Figure 9: Forecast of cement production (BMI, 2013) and steel production capacity in Java (OECD, 2013)
Under this BAU scenario, approximately 58 MTCO2 of emissions would be produced by the cement sector, and approximately 3 million tons of slag would be produced by the steel sector, in Java in 2025. Also, significant growth in both steel and cement production in Java over the coming decade is forecasted: steel production capacity is expected to expand 23% between 2015 and 2025, with cement production expected to grow 6% from 2015 to 2025. Production of slag (from steel) and GHG emissions (from cement production) are anticipated to grow by a similar amount to 2025, due to the high correlation between production and slag generation and emissions production (respectively). Slag cement in Java
17 | P a g e
GGGI – Green Industry Mapping Strategy
Business case scenario The business case scenario for re-use of slag in cement production in Java is scaled to the forecast steel and cement production levels forecast to 2025. The project period evaluated is from 2015 to 2025 and it is assumed that the cement industry will purchase blast furnace slag from steel industry as an input, grind this at an on-site grinding facility to manufacture slag powder, mix this with Portland cement to manufacture slag cement and sell it to the construction and infrastructure sector. The business case assumes that 100% of the blast furnace slag produced from steel manufacturing is fully utilized in cement production. The re-use of slag from steel production in the cement sector does not affect the growth of either of these sectors through to 2025. Growth in production capacity for both steel and cement is assumed to remain the same: it is the re-use of slag waste from steel production in the cement sector that will change. The business case straddles the steel and cement sectors, with inputs and flows between these sectors and the slag process shown in (Figure 10).
Figure 10: Structure of the business case (project scenario)
The business case is based on a single, up-front capital investment to build a slag powder processing plant. This plant would be scaled to process the slag generated from steel production facilities in Java in 2025: this means that the plant would be operating below capacity through to 2020 if forecast steel production levels are met, with high utilization from 2020 onwards (Figure 11). The overnight cash cost of the plant is USD180m for an annual throughput of 3,500kt slag (based on (Jakarta Post, 2014)): at this scale, the plant would be 63% utilised in the period to 2020, with utilisation increasing to 87% from 2020 onwards with the availability additional slag from new and/or expanded steel production facilities 1.
1
It is assumed that around 33% of the output from steel production is blast furnace slag (POSRI, POSCO Research Institute).
Slag cement in Java
18 | P a g e
GGGI – Green Industry Mapping Strategy
Figure 11: Capacity and slag production assumptions (Annex 1)
3.3 Cost benefit of slag re-use Cash flow of this investment is generated based on the revenue from slag cement sales, initial investment cost of the plant (based on the joint venture case study) and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization to benchmark operating profit) ratio of a conventional cement producer in Indonesia2. Following our business case scenario and assumptions outlined in Section 3.2 and Annex 1, the Internal Rate of Return (IRR) of the investment is estimated to be around 27%, with the investment breaking even in around five years (Figure 12) and net income in 2025 will be approximately USD106m (Figure 13). This revenue is realized by the cement manufacturer from their investment in slag powder processing plant.
2
EBITDA ratio of a conventional cement producer is 35% used to derive operating profit of the project (Semen Gresik, 2012).
Slag cement in Java
19 | P a g e
GGGI – Green Industry Mapping Strategy
Figure 12: Discounted cash flow for a typical slag investment
Figure 13: Make-up of net income in 2025
As the re-use of slag in cement production reduces GHG emissions, there is the potential for an additional revenue stream to be generated by pursuing slag re-use as a Clean Development Slag cement in Java
20 | P a g e
GGGI – Green Industry Mapping Strategy
Mechanism project. The business case presented here does not include revenue from a CDM project as part of the income stream of the investment, and additional project set-up costs of around USD350,000 (Cement Sustainability Initative, 2007) would be incurred. This would generate revenue from eligible offset sales (assumed to be USD3/tCO2 abated), the CDM Project would deliver a 2.3% increase in project IRR.
3.4 Economic benefit The impact on the economy is assessed at the regional level, based under the assumption that the cumulative total sales revenue occurred (Table 5 in Annex 1) during the project period will directly affect gross regional domestic production (GDRP). Cumulative slag cement revenue from slag cement is approximately 3 billion USD (Table 6) and comparing total sales figure to 2011 GDRP data for Java provinces except Jakarta and West Java illustrated in Table 9 in Annex 1, this amount corresponds to about 1.1% of GDRP generated in Java provinces except Jakarta and 3.3% of GDRP generated in West Java.
3.5 Social impact The social impact is assessed in terms of additional job creation potential. The number of new jobs created is calculated based upon South Korea’s employment data in relation to slag production (Table 10). Over the last decade, employment from the sector has been relatively static at around 100 employees per 1mt of slag production.
Table 3: South Korea Non-metallic powder manufacturing statistics (EY Analysis) (Korean Bureau of Statistics, 2012)
South Korea Non-Metallic Powder Manufacturing (C2399300) Statistics Slag production in Korea(t) No. of employees No. of employees/mt of slag production
2005
2008
2012
16,811,220
19,200,000
25,000,000
1,810
1,856
2,478
107.67
96.67
99.12
Based on this ratio, it is expected that the business case set out here would directly generate approximately 220 new jobs in West Java from 2015 to 2019, with a further 80 jobs being created from 2020 onwards following the growth in slag production from the forecast steel capacity increase (Table 4).
Slag cement in Java
21 | P a g e
GGGI – Green Industry Mapping Strategy
Table 4: Employment Creation from slag use
Year Slag Cement Production
BFS production Employment
2015-2019 2,211 224
2020-2025 3,036 307
3.6 Environment impact The primary environmental impact of the business case for slag re-use is its GHG mitigation potential compared to the projected GHG emissions of the Java cement sector3. In this section, a comparative analysis is presented between forecast GHG emissions under the business as usual scenario, and under the business case scenario. Business as usual emissions The business as usual emissions arising from the Java cement sector over the project period are based on:
National level of cement consumption (Figure 7 in Section 2) Regional distribution of cement manufacturing capacity (Table 10 in Annex 1), and Assuming that the current relative distribution of cement production capacity will be maintained for the project period
Based on the assumption for clinker proportion in cement production volume (Table 5 in Annex 1), and baseline emission factor for clinker production, the baseline emissions in cement sector in Java has been calculated (Figure 14). Project emission Project emission scenario is developed under the assumption that all blast furnace slag produced from the current and planned steel capacity in Java (OECD, 2013) will be used to avoid clinker production for the nearby cement industry: the GHG abatement potential of the project is assumed to be directly proportional to the amount of clinker content being replaced (blast furnace slag produced) (UNFCCC, 2006). The baseline emission factor for clinker production is applied to calculate GHG emission reduction enabled by clinker dematerialization by slag use and the results are represented in Table 8 in Annex 1. Result Referring to Figure 14, slag re-use for clinker substitution would deliver emission reductions from 4.7% to 6.2% (5.4% on average) annually compared to baseline scenario over the project lifecycle. The emission reduction rate varies during the project as it is based on planned steel capacity output.
3
Alongside emissions abatement, the business case would also reduce the amount of slag waste that needs to be disposed of in landfill.
Slag cement in Java
22 | P a g e
GGGI – Green Industry Mapping Strategy
Figure 14: Emission before and after the project activity (see Annex 1, Table 7 for underlying data)
In 2020, following a planned expansion in steel capacity in Indonesia, the production of blast furnace slag will increase accordingly. Under the business case scenario, the slag processing facility has the capacity to fully process all additional slag generated from the forecast steel production increase in 2020: as a result, there is an increase in emissions abatement in 2020 (both in relative and absolute terms). Beyond 2020, the absolute level of abatement is retained; however, in relative terms, the impact of the slag processing plant falls as total cement production continues to rise (see Annex 1, Table 8). The absolute emissions abatement arising from the project in 2025 is shown in Figure 15.
Figure 15: Emissions impact versus baseline in 2025
Slag cement in Java
23 | P a g e
GGGI – Green Industry Mapping Strategy
3.7 Summary The substitution of clinker by blast furnace slag offers a near-term, cost-effective opportunity for the cement sector in Indonesia. The geographical proximity of steel and cement industry, with its heavy concentration in West Java, will facilitate this process further by minimising transportation cost of slag. Such an investment will also support regional economic development, contributing to regional output and delivering a (modest) increase in jobs. At the same time, the investment will deliver emissions abatement in the cement sector: given the economic viability of the project, this emissions abatement would be delivered at negative cost. This scenario is based on a number of assumptions (Annex 1), and there are limitations in accumulating these benefits outlined in the analysis. The following section will set out the key challenges, while Section 5 proposes actions to support the business case.
Slag cement in Java
24 | P a g e
GGGI – Green Industry Mapping Strategy
4 Key challenges Indonesia is targeting a 15% reduction in clinker usage per annum by 2030, from producing blended cement (Indonesia’s Climate Change Sectoral Roadmap (BAPPENAS, 2010)). To support this vision, two key areas for policy improvement have been identified: Area 1: Review hazardous waste register and permit requirements for the cement industry Indonesia’s current approach to hazardous waste management, and the policies that constrain waste use, present a significant barrier to businesses seeking to utilize steel slag. However, in other jurisdictions, reform of waste policy has supported the effective re-use of waste materials: the EU’s hazardous waste policy, which supports the removal of slag, tires and other high value waste resources from the hazardous waste register, could be a benchmark for Indonesia’s policy on hazardous waste. Area 2: Review and set new cement performance standards - to avoid over specification of cement strength for use, and therefore reduce overall demand for clinker content The GoI acknowledges that the majority of the emission abatement opportunity in the cement sector arises from reducing the amount of clinker used in cement. While setting new performance standards for cement is one of the methods to reduce clinker content, utilizing slag cement is another option that the GoI can pursue. In this regard, it should be noted that standard SNI 1-15-7064-2004 (Indonesian National Standard) was most recently updated in 2004 (BAPPENAS, 2012). This standard should be updated, or new standard developed, with a focus on cement performance rather than composition.
4.1 Regulatory framework The policies on waste management and emission hinder the use of blast furnace slag in the cement industry: slag is categorized as a hazardous waste in Indonesia. Governmental Regulation No. 18/1999 (Amended by the Governmental Regulation No. 85/1999) defines Hazardous Waste as “the residue/leftover from business activities that contain hazards and/or toxicants due to its nature and/or its concentration and/or its amount which directly as well as indirectly, could pollute and/or deteriorate the environment, and/or harmful to the environment, health, the continuation of human life and other living creatures”. Government Regulation No. 85/1999 regarding Hazardous Waste Management lists these wastes and slag is classified under the list of hazardous waste from specific sources. However, there are current proposals for changing the categorization of certain materials, including steel slag, under B3 waste to ‘special waste’ best demonstrate Indonesia’s awareness on the potential reutilizing slag. This legal issue is the key barrier that is hampering the potential benefits of reutilizing slag.
4.2 Investment environment Based on the co-processing guideline of the Indonesian Ministry of Environment, cement producers would have to invest in the construction of pre-processing equipment and related facilities to Slag cement in Java
25 | P a g e
GGGI – Green Industry Mapping Strategy
implement alternative fuel and blended material technologies. The plants would also need special, designated manpower to handle pre-processing operation. However, some of the private parties have already expressed their intent to invest in slag-powder processing plants and to reutilize slag for cement production as seen in the joint venture case study. Opening up the development of slag reuse to a wider range of investors would increase interest in developing slag re-use projects, and increase the likelihood that appropriate skills and finance could be brought together to support development in this area.
Slag cement in Java
26 | P a g e
GGGI – Green Industry Mapping Strategy
5. Recommendations & next steps 5.1 Recommendation This business case demonstrates economic, social and environmental opportunities for the re-use of slag that arise from steel production to offset clinker production in the cement sector across Java. The technology and processes are mature and proven and, based on international experience, economically feasible with low risk even in the absence of government subsidy or incentive. Furthermore, with the steel and cement industries being fundamental to infrastructure development in Indonesia; creating environmental and economic synergies between these two industries will deliver a green growth opportunity to a wide range of infrastructure and construction activities. Internationally, slag is often classified as a by-product, while the Government of Indonesia has so-far classified slag as a hazardous waste. This is limiting slag-related investment potential. However, Government of Indonesia has begun to recognise the potential opportunity of slag and took an initial step toward slag utilization by issuing a one-off permit for the joint venture between Krakatau Steel and Semen Indonesia. This activity clearly demonstrated that the industries are ready to adopt this green growth option, which if deployed more widely could bring about not only emission reductions, but also economic and social benefits - such as additional employment. The following actions could contribute to unlocking the long-term economic and environmental potential from the re-use of slag in both the steel and cement sectors:
Reviewing other countries’ experiences and leading practices Reviewing the hazardous waste regulation and permit requirements for slag reutilization Reviewing and setting new slag cement standards Ensuring that a wide cross-section of stakeholders – to include policymakers, regulators, steel and cement industry associations, investors, technical experts, NGO, and international development agencies – be brought into the consultation and policy development activities
The recommended actions outlined above will reduce the current business and investment uncertainty related to slag utilization we have highlighted.
5.2 Next Steps The significant barriers identified to address in bringing about policy reform would enable slag to be re-used in the cement sector. The Government of Indonesia should work with private sector participants to confirm the opportunities presented in this report that will unlock the economic and environmental benefits of this strategy, and address any concerns that may be raised. Industry players may well be cautious of over-stepping their current mandate for engagement with the Government of Indonesia. Despite this, opportunity advancement will come from a desire from private parties and policy willingness. Initial work to understand and benchmark international leading practices may facilitate engagement on the issues. Slag cement in Java
27 | P a g e
GGGI – Green Industry Mapping Strategy
References BAPPENAS, 2010. Indonesia Climate Change Sectoral Roadmap, s.l.: BAPPENAS. BAPPENAS, 2012. Indonesia Climate Change Sectoral Roadmap, s.l.: s.n. BMI, 2013. Indonesia Infrastructure Development Forecast, s.l.: Business Monitor International. BMZ, 2009. GHG Emissions released by the manufacturing industries in Java, s.l.: BMZ. BPS, 2012. August Booklet of Statistics, s.l.: BPS, Indonesia. Cement Sustainability Initative, 2007. Indocement CDM Project, s.l.: Heidelberg Cement. Deutschebank, 2013. Semen Indonesia, s.l.: PT Deutsche Bank Verdhana Indonesia. EC Directive, 2007. Guidelines on the interpretation of key provisions of Directive 2008/09 on EC Waste, s.l.: s.n. EC, 2012. Circular Economy / Greening the Economy , s.l.: s.n. Euroslag&Eurofer, 2012. Position Paper on the Status of Ferrous Slag - Complying with the Waste Framework Directive and the REACH Regulation, s.l.: s.n. Euroslag, 2011. [Online] Available at: www.euroslag.com Euroslag, E., 2012. Position Paper on the Status of Ferrous Slag, s.l.: Euroslag, Eurofer. GGGI, 2013. Green Growth Program. [Online] Available at: http://gggi.org/wp-content/uploads/2013/10/A4-low-Indonesia-oct.pdf [Accessed January 2014]. IDX, 2013. Semen Indonesia Interview, s.l.: Indonesia Stock Exchange. Indonesian Mining Association, 2012. government eases regulation on B3 industrial wastes. [Online] Available at: http://www.imaapi.com/index.php?option=com_content&view=article&id=537%3Agovt-eases-regulationon-b3-industrial-wastes&catid=47%3Amedia-news&Itemid=98&lang=id [Accessed 25 05 2014]. Jakarta Post, 2014. Semen Indonesia Eyes 2014 Sales Rise. [Online] Available at: http://www.thejakartapost.com/news/2014/02/25/semen-indonesia-eyes2014-sales-rise.html KimEng, 2013. Cement Sector, s.l.: Kim Eng. Slag cement in Java
28 | P a g e
GGGI – Green Industry Mapping Strategy
Korean Bureau of Statistics, 2012. Non-metallic power manufacturing statistics, s.l.: s.n. Lafarge, 2014. Benefits of Slag Cement. [Online] Available at: www.lafarge.com Ministry of Industry of Indonesia, 2011. Investment Potentials in Metal, Machineries and Electronics Industry, s.l.: s.n. Ministry of Industry of Indonesia, 2012. Industry Facts and Figures, s.l.: Ministry of Industry of Republic of Indonesia. MP3EI, 2011. Masterplan for Acceleration and Expansion of Indonesia Economic Development 2011 - 2025. s.l.:Ministry for Economic Affairs, Indonesia. OECD, 2013. The Structure and Prospects of the Indonesia Steel Industry, s.l.: OECD. POSFINE, 2014. Processing. [Online] Available at: http://www.posfine.com/ [Accessed 15 05 2014]. Semen Gresik, 2012. The prospect of Indonesian cement industry, s.l.: Semen Gresik. SemenIndonesia, 2012. The Prospect of Indonesia Cement Industry, s.l.: Semen Indonesia. Slag Cement Association, 2013. Slag Cement and the Environment, s.l.: s.n. Steelguru, 2014. PT Krakatau Steel and PT Semen ink BF slag JV. [Online] Available at: http://www.steelguru.com/international_news/PT_Krakatau_Steel_and_PT_Semen_ink_BF _slag_JV/330815.html UN Comtrade, 2012. Product HS Code 2523 Prices, s.l.: UN Comtrade. UNCRD, 2013. Fourth Regional 3R Forum in Asia “3Rs in the Context of Rio+20 Outcomes – The Future We Want” , s.l.: UNCRD. UNFCCC, 2006. Indocement Blended Cement Project, s.l.: UNFCCC. UNFCCC, 2006. Indocement Blended Cement Project, s.l.: UNFCCC. US Geological Survey Mineral Resources, 2010. US Geological Survey Mineral Resources Program, s.l.: US Geological Survey Mineral Resources. World Resources Institute, 2011. Climate Analysis Indicators Tool , s.l.: s.n.
Slag cement in Java
29 | P a g e
GGGI – Green Industry Mapping Strategy
Annex 1: Annual cost-benefit and related data Table 5: Key assumptions
Variable
Value
Slag production rate (POSRI, POSCO Research Institute)
33%
Baseline Emission factor for clinker production
0.894
Slag cement (HS Code 2523) price (UN Comtrade, 2012)
$68 / tonne
Inflation rate (incorporated into increase in sales price)
7% per annum
Income Tax
25%
Discount rate
10%
Revenue modelling (EBITDA Assumption) (Semen Gresik, 2012). Typical clinker content in Indonesia cement industry
35% 90%
Table 6: Assumptions on Cost-Benefit of Slag Reuse (UNFCCC, 2006) (BMZ, 2009)
Blastfurnace slag in Java Price(BFD Cement) Sales Rev. (BFS Cement) Operating Profit Income Tax Net Income Discounte d Net Income
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
kt/y
2,211
2,211
2,211
2,211
2,211
3,036
3,036
3,036
3,036
3,036
3,036
USD
68.38
73.17
78.29
83.77
89.63
95.90
102.62
109.80
117.49
125.71
134.51
Thousan d USD
151,18 5
161,76 8
173,09 2
185,20 8
198,17 3
291,16 6
311,54 8
333,35 6
356,69 1
381,66 0
408,37 6
52,223
55,879
59,791
63,976
68,454
100,57 7
107,61 7
115,15 0
123,21 1
131,83 6
141,06 4
13,056
13,970
14,948
15,994
17,114
25,144
26,904
28,788
30,803
32,959
35,266
39,168
41,909
44,843
47,982
51,341
75,433
80,713
86,363
92,408
98,877
105,79 8
35,607
34,636
33,691
32,772
31,879
42,580
41,418
40,289
39,190
38,121
37,082
Thousan d USD Thousan d USD Thousan d USD Thousan d USD
Table 7: Baseline emission (EY Analysis) Unit Cement production in Java Clinker production in Java Baseline emission
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
kt/ year
40,398
42,822
45,391
48,115
51,001
54,061
57,305
60,743
64,388
68,251
72,346
kt/ year
36,277
38,454
40,761
43,207
45,799
48,547
51,460
54,548
57,821
61,290
64,967
ktCO2e / year
32,432
34,378
36,440
38,627
40,945
43,401
46,005
48,766
51,692
54,793
58,081
Slag cement in Java
30 | P a g e
GGGI – Green Industry Mapping Strategy
Table 8: GHG emission avoided (EY Analysis) Unit BFS pig iron production in Java Blast-furnace slag in Java GHG avoided GHG reduction compared to baseline
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
kt/y
6,700
6,700
6,700
6,700
6,700
9,200
9,200
9,200
9,200
9,200
9,200
kt/y
2,211
2,211
2,211
2,211
2,211
3,036
3,036
3,036
3,036
3,036
3,036
kt CO2e/ y
1,977
1,977
1,977
1,977
1,977
2,714
2,714
2,714
2,714
2,714
2,714
%
6%
6%
5%
5%
5%
6%
6%
6%
5%
5%
5%
Table 9: Regional GDP (BPS, 2012)
Corridor
Province
GDRP (billion USD, 2011)
Java
West Java
$ 89b
Java
Java provinces except Jakarta
$259b
Table 10: Capacity of cement industry (Semen Gresik, 2012)
Cement Capacity Sumatra Java Kalimantan Sulawesi Lesser Sunda Islands
Slag cement in Java
Capacity 9.3 38.5 4.7 3.8 0.5
31 | P a g e
Capacity Share 16% 68% 8% 7% 1%